Long Island Power Utility Up for Sale

By ANDREW ROSS SORKIN and JAD MOUAWAD

Published: February 17, 2006

The KeySpan Corporation, which provides electricity and natural gas to more than a million customers on Long Island, has been put up for sale and has already attracted offers of more than $6.5 billion, according to people involved in the process.

Two big utility companies, Consolidated Edison and National Grid, have emerged as the front-runners to acquire KeySpan, and a bidding war between the two may ensue, these people said.

KeySpan is the fifth-largest distributor of natural gas in the United States and the largest in the Northeast, operating gas utilities in New York, Massachusetts and New Hampshire that serve 2.6 million customers.

The company is the largest generator of electricity in New York State, with approximately 6,600 megawatts of capacity. It provides power to 1.1 million customers of the Long Island Power Authority and supplies about a quarter of New York City's capacity needs.

A spokeswoman for KeySpan did not return a call seeking comment last night.

Consolidation in the power market has gained momentum over the last year as utilities have sought to grow through acquisitions.

Utility companies successfully lobbied Congress last year to repeal a Depression-era law that discouraged cross-state ownership in the power and gas business. While the repeal of the Public Utility Holding Company Act of 1935, part of a wide-ranging energy bill last summer, came into effect just this month, it had been long anticipated, fueling the wave of deal-making.

But coming at a time of rising energy costs, the recent deals have come under scrutiny by federal regulators, caused anxiety among consumer groups and raised fears that the combinations would do little to drive down electricity prices.

The largest announcement so far, and a test in the industry, is Exelon's plan to buy the Public Service Enterprise Group, the parent of New Jersey's largest utility, Public Service Electric and Gas, for about $13 billion. The deal, announced in late 2004, would create the biggest utility in the country, but remains under review by federal regulators.

In two similar deals that are also pending, the FPL Group, the parent of Florida Power and Light, agreed to acquire the Constellation Energy Group for about $11 billion in December; and Duke Energy said in May that it had agreed to buy Cinergy in an all-stock deal valued at $9 billion. Even Warren E. Buffett has joined in, with an agreement to buy an electric utility, PacifiCorp, for $5.1 billion.

This recent wave of acquisitions is pushing the power business into its most profound transformation since the electricity industry was deregulated in the mid-1990's. At the time, utilities were forced to sell their power plants in the hope of lowering electricity prices by spurring competition in local monopolies.

Over all, electricity prices have risen since, partly because of much higher natural gas costs, and also because few new power plants have been built.

But premiums for power takeovers have come down sharply. And according to people involved in the process, KeySpan is unlikely to be taken over for much more than $40 a share. Its shares fell 8 cents yesterday, to $36.18. It has a market capitalization of $6.3 billion.

KeySpan, based in Brooklyn, was formed in 1998 from the merger of KeySpan Energy, the parent of Brooklyn Union Gas, and some businesses of the Long Island Lighting Company. That deal came about as the state took over the Long Island electricity system amid a fiasco over a $5.5 billion nuclear power plant in Shoreham that never opened.

KeySpan's two suitors have had mixed experiences in takeovers. Consolidated Edison, which distributes electricity to more than three million residential and business customers in New York City, tried to buy Northeast Utilities for $3.3 billion to expand into New England, but the deal fell apart in 2001.

National Grid, based in London, was formed after the electricity grid of England and Wales was privatized in 1990. In recent years, it has been bolstering its presence in the United States. It acquired Niagara Mohawk in upstate New York for $3 billion in 2000. Yesterday, it agreed to buy the Rhode Island assets of New England Gas for $498 million.